Goldman Downgrades Dow Chemical, Upgrades Airgas

By Dimitra DeFotis

Based on lower demand assumptions, Goldman Sachs lowered its rating on chemicals stocks Friday to neutral from attractive, and reduced earnings estimates for 2013 by 8% in the face of lower demand assumptions, especially for ethylene.

Airgas (ARG) upgraded to Buy from Neutral, 12-month price target of $70 for its defensive, late-cycle exposure and strength in packaged gases. Shares were up 1% to $63.70

Goldman (GS) analyst Robert Koort still expects 11% upside in the group, but that’s three times less than what he previously expected. He assigned the downgrade to

“a more anemic growth outlook. Chemicals stocks meaningfully outperformed the S&P 500 in 1H2011 on strong corporate earnings driven by volume growth, improved pricing power and fixed cost leverage. However, our outlook for earnings growth has decelerated substantially in recent weeks … Our economists now expect US GDP to grow only 1.7% in 2011 and 2.1% in 2012 vs. consensus estimates of 2.5% and 3.0%. … [They] assign a one-in-three risk of renewed recession in the next 6-9 months. We also expect fallout from the recent US sovereign credit rating downgrade by S&P and the associated stock market weakness to erode business confidence, further decelerating growth prospects.”

A slower economy weakens demand for a key chemical, ethylene, which is used in the production of lubricants, plastics, packaging, insulation, detergents and other products. Koort writes:

“Global ethylene demand has historically been tied to global GDP and over the past 20 years has grown at 1.3x – 1.5x global GDP growth. Based on our prior global GDP growth assumptions we estimated NTM ethylene demand growth at close to 5%, but our current less-robust GDP growth outlook suggests ethylene demand will grow at roughly half that rate.”

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